NYSBA Tax Section Report Addresses Proposed Regs on Transfer of Credits

NYSBA Tax Section Report Addresses Proposed Regs on Transfer of Credits

New York State Bar Association Tax Section

The New York State Bar Association Tax Section has issued a report on proposed regulations (<a href="/lr/resolve//7gw63">REG-101610-23</a>) regarding transfers of energy tax credits under <a href="/research/federal/usc26/6418" resolve="/lr/resolve//cq53">section 6418</a>, which was enacted as part of the Inflation Reduction Act of 2022 to expand the market for investment in projects intended to generate renewable energy and reduce greenhouse gas emissions. The Tax Section supports the approach taken in the proposed regs regarding transactions involving a partnership or an S corporation that would generally limit the circumstances under which the recapture burden would fall on the transferee taxpayer. However, section members urge Treasury to consider allocating the risk of recapture to the eligible taxpayer in all cases because it is the person that has control over the eligible credit property and therefore has the greatest ability to cause or prevent the recapture event. The Tax Section believes there are limited circumstances in which transferee taxpayers subject to <a href="/research/federal/usc26/469" resolve="/lr/resolve//cq8z">section 469</a> should be able to treat purchased credits as active. In particular, if a taxpayer owns an interest in and materially participates in a particular energy project, it should be able to purchase credits from other participants in that energy project and treat those purchased credits, along with its allocable share of credits as an owner, as active. Moreover, Treasury should consider permitting taxpayers subject to <a href="/research/federal/usc26/469" resolve="/lr/resolve//cq8z">section 469</a> that satisfy the material participation requirement regarding a specific activity (but do not own an interest in it) to treat purchased credits from that activity as non-passive, members say. The Tax Section suggests that the final regs “find the appropriate balance between competing policies involving consistent application of general tax principles, on one hand, and the policy of section 6418 to encourage investment in clean energy and related projects, on the other.” Section members believe the approach adopted by Treasury for expenses generally should govern situations in which a transferee taxpayer incurs an economic loss because the purchase price of the credit and the related transaction expenses exceed the amount of credits received from the eligible taxpayer (other than because of an excessive credit transfer). The Tax Section contends that that the most straightforward interpretation of <a href="/research/federal/usc26/6418#cq53-0000016" resolve="/lr/resolve//cq53#cq53-0000016">section 6418(e)(2)</a> would be to apply the second transfer rule to prohibit only successive transfers made by the transferee taxpayer specified in the transfer election. However, if Treasury concludes that the rule is intended to apply more broadly (such as to prevent the development of a liquid trading market or derivatives activity by dealers and third parties other than the eligible taxpayers), section members say the final regs should provide a clear and administrable rule for eligible taxpayers and transferee taxpayers to determine when a transfer of a specified credit portion is deemed to occur. The Tax Section believes that the antiabuse rule in prop. reg. section 1.6418-2(e)(4) should include specific examples demonstrating how the rule applies in contexts beyond allocation of consideration. Moreover, the antiabuse rule should be drafted with recognition of the difficulty taxpayers may face in applying an antiabuse rule under <a href="/lr/resolve//cq5cq53">section 6418</a>, given the potentially conflicting tax and energy policy goals underlying the statute, members say. Although section members generally agree with the approach taken in the proposed regs regarding the prefiling registration process and that the information required serves the policy of efficiently preventing fraud and abuse in the credit transfer market, they recommend that Treasury allow for short-form re-registration each year for production tax credits and that the retention period for the minimum documentation be clarified and possibly shortened. The Tax Section proposes that income received by an eligible taxpayer regarding an excessive credit transfer should be taxable as ordinary income recognized in the year of the excessive credit determination and that any corresponding indemnity payment should be an ordinary deduction except to the extent it represents a reimbursement of penalties paid to the IRS by the transferee taxpayer. Lastly, section members believe that the proposed regs would benefit from addressing the treatment of credits that have not yet been transferred by a real estate investment trust for purposes of the asset test because tax credits are not the usual type of asset that can be easily classified as real estate. Moreover, Treasury should consider providing that those credits will be disregarded in determining whether the REIT satisfies the asset test.

The New York State Bar Association Tax Section has issued a report on proposed regulations (REG-101610-23) regarding transfers of energy tax credits under section 6418, which was enacted as part of the Inflation Reduction Act of 2022 to expand the market for investment in projects intended to generate renewable energy and reduce greenhouse gas emissions.

The New York State Bar Association Tax Section has issued a report on proposed regulations (REG-101610-23) regarding transfers of energy tax credits under section 6418, which was enacted as part of the Inflation Reduction Act of 2022 to expand the market for investment in projects intended to generate renewable energy and reduce greenhouse gas emissions. The Tax Section supports the approach taken in the proposed regs regarding transactions involving a partnership or an S corporation that would generally limit the circumstances under which the recapture burden would fall on the transferee taxpayer. However, section members urge Treasury to consider allocating the risk of recapture to the eligible taxpayer in all cases because it is the person that has control over the eligible credit property and therefore has the greatest ability to cause or prevent the recapture event. The Tax Section believes there are limited circumstances in which transferee taxpayers subject to section 469 should be able to treat purchased credits as active. In particular, if a taxpayer owns an interest in and materially participates in a particular energy project, it should be able to purchase credits from other participants in that energy project and treat those purchased credits, along with its allocable share of credits as an owner, as active. Moreover, Treasury should consider permitting taxpayers subject to section 469 that satisfy the material participation requirement regarding a specific activity (but do not own an interest in it) to treat purchased credits from that activity as non-passive, members say. The Tax Section suggests that the final regs “find the appropriate balance between competing policies involving consistent application of general tax principles, on one hand, and the policy of section 6418 to encourage investment in clean energy and related projects, on the other.” Section members believe the approach adopted by Treasury for expenses generally should govern situations in which a transferee taxpayer incurs an economic loss because the purchase price of the credit and the related transaction expenses exceed the amount of credits received from the eligible taxpayer (other than because of an excessive credit transfer). The Tax Section contends that that the most straightforward interpretation of section 6418(e)(2) would be to apply the second transfer rule to prohibit only successive transfers made by the transferee taxpayer specified in the transfer election. However, if Treasury concludes that the rule is intended to apply more broadly (such as to prevent the development of a liquid trading market or derivatives activity by dealers and third parties other than the eligible taxpayers), section members say the final regs should provide a clear and administrable rule for eligible taxpayers and transferee taxpayers to determine when a transfer of a specified credit portion is deemed to occur. The Tax Section believes that the antiabuse rule in prop. reg. section 1.6418-2(e)(4) should include specific examples demonstrating how the rule applies in contexts beyond allocation of consideration. Moreover, the antiabuse rule should be drafted with recognition of the difficulty taxpayers may face in applying an antiabuse rule under section 6418, given the potentially conflicting tax and energy policy goals underlying the statute, members say. Although section members generally agree with the approach taken in the proposed regs regarding the prefiling registration process and that the information required serves the policy of efficiently preventing fraud and abuse in the credit transfer market, they recommend that Treasury allow for short-form re-registration each year for production tax credits and that the retention period for the minimum documentation be clarified and possibly shortened. The Tax Section proposes that income received by an eligible taxpayer regarding an excessive credit transfer should be taxable as ordinary income recognized in the year of the excessive credit determination and that any corresponding indemnity payment should be an ordinary deduction except to the extent it represents a reimbursement of penalties paid to the IRS by the transferee taxpayer. Lastly, section members believe that the proposed regs would benefit from addressing the treatment of credits that have not yet been transferred by a real estate investment trust for purposes of the asset test because tax credits are not the usual type of asset that can be easily classified as real estate. Moreover, Treasury should consider providing that those credits will be disregarded in determining whether the REIT satisfies the asset test.

Sec. 6418 Transfer of certain credits.

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NYSBA Tax Section Report Addresses Proposed Regs on Transfer of Credits